The Ministry of Defence will reluctantly hand control of a project to build two new aircraft carriers for the Royal Navy to BAE Systems in an attempt to avoid a £700 million tax bill.

The £3.8 billion carriers will be built by an alliance of engineering companies including BAE, VT, Babcock and Thales UK, but only one must be named prime contractor. In a twist of tax law, VAT is applied to ships built by multiple companies but not to those built by only one.

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